Gold Prices Seeing Little Love As Bond Yields Remain At 2011 Highs
Analysts note that higher bond yields are keeping a lid on gold as prices remain below $1,200 an ounce. December gold futures last traded at $1,192, relatively flat on the day. Meanwhile, the U.S. 10-year bond yield last traded at 3.22%.
In an emailed comment to Kitco News, Jameel Ahmad, global head of currency strategy and market research at FXTM, said that he doesn’t see bond yields pushing much higher in the short term.
“I would say it is going to take quite a significant amount of time in financial market terms for 10-year yields to move that much higher than current levels. The view that we could see 4% one year from now is reasonable,” he said.
Harry Tchilinguirian, global head of commodity markets strategy at BNP Paribas, said in an email to Kitco News that bond yields can push higher if the U.S. economic data shows that the economy is still firing on all cylinders. He added that this would be bad for gold prices.
“If U.S. economic data continues to surprise to the upside, then expectations around the number of Fed rate hikes in 2019 can be revised up and consequently nudge bond yields higher, generating just enough incremental opportunity cost in holding gold to send the price of the yellow metal lower,” he said. “One also has to account for the fact that the $1,180 to $1,200 /oz price range for gold is an important psychological barrier for the market to breach on the downside as it invites buying the dips by private wealth managers. This helps in part explain the recent disconnect between yield and gold prices.”
However, Ahamad warned that gold investors should not expect to see a recovery in gold prices even if bond yields are capped. For the gold market, Ahmad said higher bond yields will continue to support the U.S. dollar as investors see value in U.S. sovereign debt.
“The news that the 10-year yield has moved above 3.25% for the first time since 2011 could possibly encourage investors to take their money away from emerging assets, and invest in the [U.S. dollar] instead,” he said.
Looking ahead, Ahmad said that he expects that in the current environment, gold could remain under pressure for the rest of the year and could fall to 2016 lows.
“I do see more pressure in the commodity until the end of the year and I wouldn't be surprised to see gold break below the $1,150 level at the very least. Basically, as long as the dollar is in demand, the outlook remains negative for gold prices,” he said. “Only two factors can break King Dollar at this point: a removal of trade tensions, or a heavy round of comments from the Trump Administration that the dollar is too strong.”